Why Oil Is Going Higher by Marketsurfer
upply cuts from OPEC countries and growing demand from the US and China could push prices higher.
Market sentiment remains bullish, increasing prices on oil futures and further pushing up the market.
Technical analysis of the market also suggest a bullish future.
By David Goodboy
Now is the time to get long oil. This is a big change for me; I was a huge oil bear during the "peak oil" craze. It seemed clear that the new extraction technology and the ever-changing geopolitical climate would quickly eliminate the fear of oil becoming scarce.
But my investment thesis, to buck oils upward trend, came to fruition faster than I expected.
The Light Crude Oil futures contract (WTI Crude) plunged from the $115.00 zone at the start of 2011 to just above $25.00 in the early months of 2016. The bulk of the dive began in mid-2014, with a precipitous fall to the lows. Fortunes were made by the oil bears who had the foresight and nerve to short in the face of massive bullish sentiment.
The oil sell-off was the primarily the result of a trifecta of factors. First, technology led to a flood of product onto the market. New extraction techniques, such as fracking, allowed producers to access untold barrels of black gold never imagined by the oil bulls. The earth went from potentially running out of oil within our lifetime to a virtually unlimited supply.
Second, political events drove prices down. At the start of 2014, rumors began to swirl around the globe that OPEC, which controls over 40% of the oil market, was not going to be able to ratify production cuts that year. During the November meeting this fear became fact, sending prices sharply lower.
Third, slowing economic activity in China and Russia has had bearish effects on price. Supply and demand have a very real power over the commodity's price. Nations like Russia are very dependent on high oil prices to finance their heavy social programs. As oil drops, less money is spent by the government, fueling the slowing economy in a never-ending downward cycle.
Then Everything Changed
Just when the oil bulls were about to throw in the towel, the bottom in price was finally hit. In the early part of 2016, oil prices plunged to just above $25.00 per barrel. Starting in February 2016, prices reversed and began to climb higher. Oil hit resistance at $55.00 per barrel, experiencing a more than 100% gain in just 12 months.
And now, despite the recent bout of profit taking, I firmly think that oil will continue to go higher. Here's why:
Macro Supply And Demand
Supply and demand are what drives all free market prices. While the oil market isn't exactly free (due to massive government interference), the same economic forces apply but are just under